Criteria for Choosing Corporate Rehabilitation or Corporate Bankruptcy for SMEs Facing Financial Crisis
무너진 재정의 잔해 속에서도, 새로운 삶을 향한 길은 법적 권리를 통해 열릴 수 있습니다.
If the business can generate operating profit, corporate rehabilitation is appropriate; if accumulating operating losses are inevitable, corporate bankruptcy is the right choice. Corporate rehabilitation or bankruptcy is not just about numbers, but also a management strategy for a new leap forward.
In a situation where the cash flow for business operations is not smooth, is closing the business the only option? With the capital market frozen and the financial difficulties of running a business signaling a red flag, bankruptcy lawyers in Seocho-dong have become increasingly busy. Cha Hye-seon, a lawyer handling about 350 corporate rehabilitation cases and 150 corporate bankruptcy cases, shared insights through an interview on corporate rehabilitation versus bankruptcy.
Q: What are the differences between corporate rehabilitation and corporate bankruptcy, and which situation is each suitable for?
A: Corporate rehabilitation allows a business to continue operating, paying down debts over 5 to 10 years, while the remaining debt is forgiven. Corporate bankruptcy involves liquidating all the company’s assets to repay debts, and any unpaid debt is forgiven, with the company being dissolved. If a company is facing liquidity issues such as unpaid trade debts, tax arrears, overdue loan interests, or unpaid employee wages, but it can still generate revenue and operating profit, corporate rehabilitation is the better option. If the business is unlikely to generate a profit despite all efforts, corporate bankruptcy would be more appropriate.
Q: Can you provide examples of cases where corporate rehabilitation or bankruptcy was applied?
A: When faced with financial difficulties, CEOs often hesitate between corporate rehabilitation and bankruptcy. For example, if there is no real estate-backed loan and the company has around 30 billion won in unsecured debts, but sales and operating profits are still strong, the company could reduce fixed costs like employee wages, and repay the debts over 5 years, with the remaining debt forgiven. However, if a company owns a factory with 60% of its debt secured by collateral and the factory has low productivity or profitability, it may be more advisable to choose corporate bankruptcy and sell the factory, possibly leasing it back, as it would be difficult to continue generating profits.
Q: What happens to the CEO who has personally guaranteed loans when a company files for corporate rehabilitation?
A: When a company takes out a loan or receives a guarantee, the CEO often co-signs. Even if the company files for corporate rehabilitation or bankruptcy, the CEO's personal guarantee remains intact. Although the co-signing system was abolished on April 1, 2021, guarantees written prior to that date are still valid, and financial institutions often require limited personal guarantees. Therefore, when consulting an expert on corporate rehabilitation, it’s crucial to carefully review the CEO’s guarantee debts and other liabilities, like tax arrears and unpaid employee wages. If these liabilities are not handled properly, it could lead to fraudulent claims or actions during the rehabilitation process.
Q: What happens when a company undergoes corporate rehabilitation or bankruptcy and the CEO's personal debt is involved?
A: When a company undergoes corporate rehabilitation or bankruptcy, the CEO can resolve their personal debts through the rehabilitation or bankruptcy process. If the CEO’s salary remains intact after the company’s rehabilitation, they can use their disposable income to repay their debt, with the remaining debt being forgiven. Alternatively, if the CEO is unable to work, personal assets may need to be liquidated to settle the debt, with the remaining debt being forgiven.
Q: What are the advantages of M&A during corporate rehabilitation, and when should it be pursued?
A: Acquiring a company undergoing rehabilitation offers the advantage of having prior debts reduced to net asset value, and any potential contingent liabilities are also eliminated. The M&A market for rehabilitating companies is growing. In corporate rehabilitation, the court initiates the process by appointing an accounting firm as the examiner, who evaluates the company’s value. If the court decides that rehabilitation is viable, a rehabilitation plan is submitted. In the past, many M&A deals were conducted before the court approval, but now, companies often find potential buyers before applying for rehabilitation, increasing the frequency of M&A during rehabilitation.
Q: What is the secret to a high success rate in corporate rehabilitation and bankruptcy cases?
A: Beyond accurately analyzing a company’s financial data, it’s essential to thoroughly evaluate the company’s future value, the CEO’s and employees’ will, and utilize support programs from organizations like the Ministry of SMEs and Startups and the Korea Asset Management Corporation (KAMCO) to take advantage of available benefits. Legal approaches alone are insufficient; a comprehensive approach, involving financial and legal expertise, careful inspections, and long-term perspectives, is crucial to providing realistic solutions for the company and the CEO’s debt problems.
Q: What advice would you like to offer at the end?
A: Many business owners seek advice on corporate rehabilitation or bankruptcy only after their finances are seriously strained. However, it is wise and strategic to consult with experts before financial problems escalate, allowing for preventive measures and potentially saving the company. Corporate rehabilitation or bankruptcy should not be seen as failure but as part of a strategic management approach for a new beginning. Addressing signs of financial trouble early and consulting experts can help business owners make the right decision and avoid total failure.
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